Peso fundamentals are relatively supportive: the economy is growing at a solid clip, inflation remains well-contained, fiscal and current account deficits look manageable, and the central bank’s policy rate remains well above its US equivalent. Political uncertainty is falling after the summer election and this autumn’s judicial reforms. 

The outlook nonetheless hinges on whether US President Trump follows through on campaign pledges to restrict immigration and apply taxes on products imported from Mexico. Heavy tariffs could inflict serious damage on the country’s export sector, and if migrants are sent home, remittances could plummet, depriving the economy of one of its most important sources of income.

Remittances are a vital source of foreign exchange.
Mexico current account balance, four-quarter rolling sums, billions USD
Q1 2003 – Q2 2024

The peso will likely stay under pressure into early 2025 as the exchange rate adapts to a more challenging external environment, but we suspect that investors’ worst downside fears will ultimately go unrealised. Still-positive rate differentials should act to buffer negative moves, and President Claudia Sheinbaum’s team is well-prepared for the negotiations that will surround Trump’s return. A healthy risk discount should be embedded in the currency for now, but we think the peso could appreciate slightly through the middle of the year as Mexico accedes to US demands and the economy remains surprisingly resilient.

Rate differentials should buffer the exchange rate.
Central bank policy rates and one-year forward swap rates, %
January 2019 – December 2024